Establish a new entity, EoR or Direct Employment. What’s best for you?

  • March 4, 2022
  • Author: Carly Merrett
Reading Time: 5min
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It’s becoming increasingly common for companies to look abroad to fill key roles. While this broadens the pool of people and represents significant opportunities for both employees and employers alike, it’s not without concern for the legal ramifications of cross-border employment. So, how do employers maintain the benefits of international hiring without breaking the rules?

Legal Entity 

There are a few options but the obvious one is to set up a legal entity. A legal entity offers you and your employees the same hiring conditions and almost all but removes the legal and tax compliance risks. Clients enter into a contract and still maintain full authority over recruitment, hiring and onboarding as well as management of that employee. 

 

But there’s a catch. Setting up a legal entity is expensive. Navigating local employment labour and tax laws alone can prove very costly for legal and HR teams, both in time and money. It’s likely they will have to work with local tax and finance lawyers, and with average hourly rates for attorneys ranging between €100 and 300 per hour, those amounts start to add up pretty quickly. Then there are start-up capital amounts which can range from anywhere between zero to tens of thousands of euros.

 

In Germany for example, a registration fee of €400 is required, along with €25,000 in start-up capital. The UK have start-up capital requirements of £50,000 (approximately €60,000). Other places are much lower, however —  Poland is as low as €1,200 while Spain this amount is €3,000. In Portugal, for example, it’s free if you’re a Freelancer or ‘Solopreneur’ but the number is harder to ascertain for limited companies, further highlighting the legal, financial and administrative burdens starting a legal entity can bring. 

 

Appointing a local director, opening a local bank account and setting up payroll are also things that need to be considered. Both corporate and employee tax obligations must also be met. So, certainly, a legal entity has traditionally been a way for companies to expand, however it does not represent a viable solution every time an international candidate doesn’t wish to relocate. 

Employer of Record

The other option is using an Employer of Record (EoR). An EoR is a third party company that specialises in understanding the laws of the other country and who act on behalf of the client. An EoR does not recruit but manages the process of onboarding, ensuring full legal compliance. As experts in the local country, they provide a framework that both the employer and employee work within which doesn’t break any rules. 

 

Third-party involvement, however, can make some clients nervous. However, EoR solutions offer the same legal framework as a legal entity without all the hidden and upfront costs. 

Take our TIS case study, for example. In establishing an EoR using our WorkGlobal solution, a rapidly growing tech company were not only able to access specialised talent from a wider pool of candidates, they streamlined the entire onboarding process minus any legal and tax compliance risks.

 

EoR works for businesses looking to truly go global. WorkGlobal simplifies testing local markets and accessing international talent.

Learn more about WorkGlobal

Direct Employment

Another tool for the quest of cross-border hiring is Direct Employment. Direct Employment directly establishes a local presence in the form of a foreign company, not a legal entity. It differs from EoR in that there is no third party involved in onboarding. While initial start-up can take up to six weeks, once the registration is complete companies can continue hiring from that country very quickly at a lower cost than an EoR. EoR solutions operate on an individual basis.

 

There are distinct advantages to Direct Employment. First of all, you establish a direct relationship with your employees and it enables you to offer stock options as part of their employment package since you’re hiring them on your own employment contracts. Unlike establishing a legal entity, companies are able to employ numerous employees with far less commitment.

 

Direct Employer is only suitable if your international recruitment plans are limited and specific, not for true global expansion. 

 

Learn more about WorkDirect

Summary

As employers find themselves scrambling for ways to secure teams from across the globe, it’s useful to have options. When testing out international opportunities, fewer start-up costs and reduced risk makes better business sense. WorkMotion products are designed to help companies get the most out of these opportunities and provide flexibility in the workplace.

 

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